Consumer debt now tops $10 trillion. It's no secret that too many Americans are drowning in debt (from credit cards and many other sources), so it should be no surprise that debt collection is now a big business. If you're interested in investing in a rapidly growing industry, it's definitely one to consider. According to a Washington Post article, the number of debt collection firms has increased from roughly 12 in 1996 to more than 500 today.

What may be surprising, though, is how debt collection sometimes works. The Post article also noted the following:

Year in, year out, the Federal Trade Commission receives more complaints about debt collectors than any other industry. But in recent years, these complaints have skyrocketed -- from 13,950 in 2000 to 58,687 last year. Complaints about third-party debt collectors accounted for close to one in six of all FTC complaints last year, up from 9.5% in 2000.

Playing dirty
So what are some of these collection firms doing that's not so aboveboard? Well, a bunch of things:

  • Sometimes they're chasing after debts that people may no longer legally owe, because of a statute of limitations.

  • Sometimes they're not chasing the actual debtors, but instead people somehow associated with them (often remotely), or even simply people with similar names.

  • Sometimes they harass people by calling repeatedly and using other tough tactics. Some have called debtors and others at work. Some have even threatened violence.

  • Some debtors have been surprised to find their wages garnished or liens placed on their homes.

One thing you may not know about debt collectors is that they buy lists of debtors. You may owe some money to a credit card issuer, like Citibank (NYSE:C), Capital One, or Bank of America (NYSE:BAC), but that issuer may give up on collecting the full amount from you. If it does, it may sell your debt to a collection company for pennies on the dollar -- on average, 5 cents. Then the collector will track you down and try to get as much as possible from you -- often 25 cents on the dollar or even more.

Things can get shadier from this point. If PayUsNow Inc. hits you up for $10,000 that you owe, and you agree to pay $4,000 to settle the claim, PayUsNow might turn around and sell the remaining $6,000 debt to another firm, which will then take over shaking you down.

The Post article cited Sonya Smith-Valentine, a lawyer who has represented debtors, who noted a "growing number of cases in which collectors persuade a consumer to pay just a little -- and then use the bank information from that payment to improperly withdraw more funds from the consumer's account." Yikes.

Despite the dark picture I'm painting right now, know that not all debt collectors operate in sinister ways. Debt collection is a legitimate business, though perhaps not a very savory one. If a business is owed money, that business is within its rights to pursue that money. And if another agent is willing to buy that debt, well . that's how an industry is born.

Why are things getting worse?
It sure seems like the collection industry is generating an increasing amount of frustration among its targets. The reason may be a simple matter of supply and demand. If you're a company with debt to sell, and you have only a few buyers, you may not have much power to negotiate a good rate for yourself. But now that there are scores of potential buyers, you can hold out for a good rate.

Meanwhile, the buyers, which are now competing with each other more fiercely, are paying more for each dollar of debt they buy. So to turn a profit, they need to collect a greater percentage of each debt. They need to squeeze debtors tighter and become more aggressive. And being aggressive, for some, means operating in a gray area.

You have rights
Fortunately, you have the right to be treated fairly when it comes to debt collection. I recently summarized some of your rights when I wrote this article. You can learn even more from your friends at the Federal Trade Commission.

Avoid the hot seat
The best way to maximize your chances of being left alone by debt collectors is, of course, to not get bogged down by consumer debt you can't pay. We can help you on that front. I encourage you to spend a few minutes in our Credit Center, learning more about the credit industry and how to get out -- or stay out -- of debt. What you learn can save you a lot of headaches in the future.

Looking for investments?
Finally, know that debt collection is an industry worth considering from an investor's point of view. It's a booming business. In 2004, $77 billion of consumer debt was bought and sold, up from $12 billion in 1995. According to an MSN Money article, "Last year, more than $75 billion of [old and previously deemed uncollectible] debt was sold to collection agencies, up from virtually nothing 10 years ago." The federal government is permitting the IRS to sell billions in uncollected taxes to debt collectors. Many companies in this business are making a lot of money.

Here are some of the public companies in the industry -- the first one has been recommended in our Motley Fool Hidden Gems newsletter:

  • Portfolio Recovery Associates (NASDAQ:PRAA)
  • Encore Capital Group (NASDAQ:ECPG)
  • Asta Funding (NASDAQ:ASFI)
  • Asset Acceptance Capital (NASDAQ:AACC)

You may also want to read these articles related to the industry:

Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of no companies mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.